Flotations

Have you outgrown the private equity market?

Why not consider a flotation on the public equity markets

In the UK, there are two possibilities: AIM and the Main Market. A company’s individual circumstances will dictate which is the most appropriate, with AiM for growing companies and the Main Market for larger companies.

Since it was established in 1995, AIM has become the most successful stock market in Europe. The criteria for floating on AiM are lower than those for floating on the Main Market, and AIM also gives investors valuable tax reliefs. As a result, most Initial Public Offerings (IPOs) in the UK now take place on AIM.

However, a flotation should not be entered into lightly. Companies should consider the advantages and disadvantages.

The advantages include:

  • Raising new money to grow your business organically
  • Using shares as consideration for acquisitions instead of cash resources and borrowings
  • Enhancement of your company’s status and product/service profile and an improved credit rating
  • Realisation of some of the existing shareholders’ investment and market value establishment for retained shareholdings
  • Enhanced management and employee motivation through more attractive share participation schemes.

The disadvantages include:

  • Public scrutiny and accountability, which means that the existing owners must distinguish more precisely between company and private assets and must expect and accept criticism when the company has a bad year
  • Increased vulnerability to an unwelcome takeover bid, which is dependent on the percentage of the company’s share capital in public hands
  • The possibility that a flotation may not achieve the objective of increasing the marketability in the shares of the company. This particularly applies to small companies where trading can be ‘thin’ and infrequent
  • The costs involved in the flotation. In addition to the monetary costs, it is important not to underestimate the hidden cost of the extensive time required for the flotation process by a company’s management and the consequent diversion of attention from running and developing the business
  • The probable increase in costs arising from the reporting function of the company having to be strengthened to meet increased ongoing regulatory obligations
  • Increasing outside pressure on the directors of the company, in particular with regard to the level of profits and dividends that investors expect. Results have to be released twice a year and unwelcome news or unexpected results can cause sharp reductions in the price of shares from which it may take a long time to recover.

So what makes a successful flotation? 

Advisers and investors will want a company to exhibit most, if not all, of the following:

  • A strong, experienced and broad-based management team. This should include a finance director or a clear intention to recruit one in the short term
  • An historical trading record showing good growth in turnover and profits (obviously this is not applicable to a start-up or an early stage company)
  • Reasonable prospects that growth will continue, if not accelerate, in the future
  • Being in a market sector which is in favour with investors
  • A robust and reliable accounting system
  • The willingness to accept the appointment of non-executive directors to the board.

As one of the leading accountants for AIM flotations, BDO can provide objective advice as to whether a flotation is a viable option for your company. We also have excellent relationships with the leading stockbrokers to AiM companies and can introduce you to the most appropriate organisation.

For more information please contact Andrew Ware , National Head of Corporate Finance, or contact your local BDO adviser .